Newsletter - July 22nd, 2023

Dear Reader,

Attached is our latest list of stocks generated from basic value screens (low p/e, ev/ebitda, debt/equity, etc.), which don’t meet our investment criteria - and our reasoning.

This may help you avoid a few ‘value traps’ or stocks that aren’t sufficiently attractive compared to the opportunities available today.

For reports of stock ideas that pass our quantitative and qualitative standards, join at the link below:

Join Here

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Rare Seth Klarman Interview

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Seth Klarman interview by Ted Seides

Seth Klarman was recently promoting Security Analysis 7th Edition, which includes his preface. Some notes on his interview below:

6:15 Secret

Klarman explains his start in value investing as being let in on a "secret" - "when you see individual companies trade at a discount from what they're obviously worth ... there's inefficiency here, and you have the chance to add value and do well."

7:45 Railroad bankruptcies

His mentor Max Heine was then bidding for Penn Central bankrupt bonds, which had building rights over the tracks, and real estate value in addition to the railroads.

8:45 Inefficiencies

Klarman describes a takeover offer where he received cash plus shares of a subsidiary at under 1x earnings - a glaring arbitrage opportunity you wouldn't find with conventional research.

12:00 Academics

Think like a business owner.

16:45 Groupthink

When considering allocating capital to fund managers in the early 80s, Klarman was put off by the herd mentality in popular stocks at the time and the lack of personal investment in the funds they managed.

The stock ideas we report are certainly not popular, undervalued, and we have our net worth invested in them.

20:15 Book value

Klarman says he was too enamored of book value - but he didn't do too badly with this approach.

22:45 Don't look to Mr. Market for feedback

If you're looking to exploit Mr. Market, you must be sure about the value of your investments - you can't doubt yourself when prices decline, which is why you must be certain of investment values when you get in.

We try to buy stocks that are undervalued by objective standards to provide a solid foundation to weather market turmoil.

27:45 AI vs. Human judgment

AI may be good at past pattern recognition but may not be as good in "oddball" transactions where practical judgment is required.

30:30 Supply/Demand imbalances

Worthwhile to think in terms of natural oversupply/lack of demand when seeking inefficient areas of the securities market.

33:30 Right about less

The larger the discount from value, the less you need to be right about the future of the business.

Our focus is on the margin of safety to lessen reliance on future prospects for investment success.

39:45 Low multiples

Lower price multiples of fundamental factors lead to higher and safer returns than the converse.

48:15 Averaging down

Klarman earned his largest profits from averaging down his stocks - food for thought.

50:45 First protect capital

First look at investment downside, then look at profit potential.

We strive to present stocks that have limited downside, and very little risk on a group basis.

56:30 China

Interesting to note Klarman invested in Chinese stocks earlier this year when geopolitical fears were high.

He has no views on emerging/frontier markets, "but if a stock is trading at 25 cents on the $, those things tend to work out".

1:08:00 Long-term orientation

This is essential to fruitful investment results.

1:29:45 Don't stop pulling threads

Michael Price taught Klarman to keep pulling threads on interesting ideas e.g., if a stock is cheap, look at the listed holding company, fellow subsidiaries, peers in the industry, etc.

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Until next time, Cheers!

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